News, Insights and Best Practices for Manufacturing in Mexico

U.S. power supply, Japanese auto companies moving to Mexico

Emerson Network Power, a U.S.-based company specializing in supplying power solutions to buildings in case of outages, is moving much of its business to Mexico, according to Columbus Business First. The business cites that much of this is due to the fact that the company needs to be closer to its suppliers, which are in Mexico.

"It's no reflection on employees here in the U.S., but since three-quarters of the work and materials used in production are already made in Mexicali, it's to align, reduce costs and streamline the manufacturing process," spokeswoman Lisa Hanly said.

Emerson Network Power isn't the only company that wants to be closer to its suppliers or improve its manufacturing process. Japanese automakers are also building factories in Mexico. There are so many companies building cars in Mexico that the nation is poised to become the No. 1 auto exporter to the U.S. by the end of the year 2015, according to Auto News. In 2013, Mexico will supply 1.57 million cars to the U.S. By 2014, that number will grow to 1.69 million, and become 1.9 million by 2015.

Japan tests the waters Initially before the North American Free Trade Agreement (NAFTA), there had only been a handful of companies like Ford, Volkswagen and General Motors that moved into Mexico to take advantage of its proximity to the U.S., which is cost effective because of Mexico's inexpensive, efficient labor. Companies first moved to Mexico in the 1960s, with many seemingly relocating to test the market, Auto News reported. Nissan first opened a factory in Mexico in 1966, and now it has three of them.

Many of the cars Nissan makes in Mexico are sold directly in the Mexican market. In fact, sales of cars in Mexico have grown by 7 percent annually since 2010. Mazda predicts that the market will expand 5 percent this year and 5 percent again in the following year.

Honda moved to Mexico in the mid-1990s. Toyota moved to Mexico in 2004. Both built relatively small factories, according to Auto News. Earlier factories produced around 60,000 units, but the new factories can build about 200,000 or more each year.

The Benefits of Mexico Japanese companies benefit from the Mexican manufacturing industry through the inexpensive, expert labor that Mexican workers provide. Because of NAFTA, they can now avoid paying tariffs on goods shipped into the U.S. Additionally, the supply chain is made more efficient.

Expanding to Mexico also benefits smaller cars in particular.

"[Japanese companies manufacturing in Mexico] can greatly improve the profitability of small cars," said Masatoshi Nishimoto, an analyst at IHS Automotive. "They can reduce incentives and get more flexibility on pricing."

Takanobu Ito, CEO of Honda agreed, according to Auto News.

"There's a lot of growth potential in the Mexico market and for small-vehicle demand," Ito said. "We want to build large vehicles in the U.S., and small vehicles here, for optimized production."

Other benefits include trade agreements with other nations in Latin America, which means that Japan can ship to those countries more easily and expand their brand name across North and South America. Mexico's trade agreements cover 44 countries, which makes it the perfect site for building products because companies can ship the finished products cheaply and directly. The shorter distance from the plant to the sales lot is helping companies like Mazda sell more cars in the U.S. also.

"Anything that makes Mazda more profitable will help us," said dealer Tom Carey of Ramsey Mazda in Urbandale, Iowa.

Offshoring to Mexico extends beyond Japanese car companies Not only Japan, but every nation, and especially the U.S., can benefit from expanding to Mexico, possibly through an offshore shelter to make the move into Mexico easier. Emerson Network Power moved to Mexico because its parts were built there, but other companies might move to Mexico because it's cheaper to build there and less expensive to ship to the U.S. and other parts of North and South America. An offshore shelter makes the transition easy by taking care of the red tape, allowing manufacturing companies to focus on what matters to them.